banking definition

Meaning and Definition of Bank

banking definition, It is very difficult to define the term 'bank' or 'banker' pre cisely. Even the best authorities on banking have failed to provide a precise and satisfactory definition of this term. This is because a modern bank performs numerous activities, and it is really difficult to include all the activities of a modern bank in a simple and satis factory definition.

Though it is really difficult to define the term banker precisely. several authorities have attempted to define this term in their own ways. The various definitions, attempted so far, have thrown some light on the meaning and chief characteristics of a bank. So, let us critically examine some of the important definitions, and understand the meaning and main features of a bank

Commercial Banking

Commercial banks offer wholesale and retail banking services. In the USA, commercial banking excludes, by the 1933 Glass Steagall Act, investment banking activities. Wholesale banking typically involves offering intermediary, liquidity and payment services to large customers such as big corporations and governments. They offer business current accounts, make commercial loans, participate in syndicated lending29 and are active in the interbank markets to borrow/lend from/to other banks. Global integration, technological advances and financial reforms have made parts of the wholesale market highly competitive. Most US commercial banks also have retail customers

Accoding to DR .H.L.Hart

Hart's Definition

• Dr. H.L. Hart defines a banker as "One who in the ordi nary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts". According to this definition, the essential char acteristics of a banker are

1. Acceptance (receiving) of current deposits

2 Honouring of cheques drawn against those deposits ( re payment of those deposits on demand).

• This definition, no doubt, contains a reference to one of the es sential functions of a modern bank, viz., acceptance of current deposits and repayment of those deposits on demand. But it makes no reference to the acceptance of other types of deposits

Paget's Definition:

Sir John Paget says, "No person or body corporate or oth erwise can be banker who does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and uncrossed for his customers". He further adds, "One claiming to be a banker must profess him. self to be one, the public must accept him as such and finally banking should be his main business". According to this defini tion, the essential features of a banker are

1 Acceptance of deposits of money on deposit and current

2 Repayment of those deposits

3 Collection of cheques for customers

4 Performance of banking business as the main business

This definition is no doubt, fairly exhaustive But it fails to make mention of the several agency and the general utility services ren a dered by a modern bank Definition given by the Indian Banking Regulation Act

• Section 5(1)(c) of the Indian Banking Regulation Act of 1949 defines the term "banking company" as "any company which transacts the business of banking in India".

• Section 5(1)(b) of the Same Act defines the term "bank ing" as "accepting, for the purpose of lending or investment. of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or oth erwise.

• " This Act, besides stating the main banking activities, als enumerates, in Section 6,

• the various subsidiary services, such a the collection of cheques, drafts and bills, remittance of funds, ac ceptance of safe custody deposits, etc., that are performed by bank

• This Act also stipulates that banking business should be the main business of a bank.

• Again, Section 7 of this Act requires that every banking company should use as part of its name, the term 'bank', banker' or 'banking company.

According to the definition given by the Indian Banking Regula

tion Act of 1949, the essential characteristics of a bank are:

1. Acceptance of deposits from the public on current, fixed and savings bank accounts

2 Allowing of withdrawals of those deposits by cheques, drafts, orders or otherwise.

3 Utilisation of deposits in hand for the purpose of lending or investment in securities

4 Performance of other activities called subsidiary services, in addition to the principal activities of receiving of deposits and lending of funds

5. Performance of banking business as the main business.

6 Using the term ' part of the name. bank, banker' or 'banking company as

The definition given by the Indian Banking Regulation Act of 1949 is quite satisfactory, as it comprises all the essential features of a bank

functions of banking

Primary Functions

1 Receiving of funds

2 Lending of funds

3 Investment of funds

4 Creation of Money

Receiving of funds

1 Current Accounts:

Current accounts form the most important type of bank accounts They are, generally, opened by trading and industrial concerms, public authorities, etc., which have frequent banking transactions involving huge amounts. They can be opened with a minimum deposit of Rs.2,000 or 3,000. They are opened by the customers neither for the purpose of earning interest nor for the purpose of savings, but for the convenience of making payments by cheques. Proper and satisfac- tory introductionis necessary for opening current accounts.

2 Savings Bank Accounts:

Savings bank accounts are opened by middle and low income groups, who wish to save a part of their current incomes for their future needs and earn fair interest on their deposits. They can be opened with a minimum deposit of Rs.100 when they are to be oper ated without cheques, or with Rs.1000 or more, when they are to be operated by cheques. Proper and satisfactory introduction is neces sary for opening savings bank accounts, if they are to be operated by cheques. If they are to be operated by special withdrawal forms, no introduction is necessary.

3 Fixed Deposit Accounts:

Fixed deposit accounts also form one of the most important types of bank accounts. They are opened by small investors who do not want to invest their money in risky industrial securities, but wish to deposit their money in banks and earn good and steady income. No introduction is necessary for opening the fixed deposit accounts, as they are not operated by cheques

4 Recurring Deposit Accounts or Cumulative Depot Accounts

• Recurring deposit accounts are variante of and innovation over the savings bank accounts. They have become very poeder in cent years

• Recurring deposit accounts are meant for people who have reg lar monthly incomes

• They are intended to encourage the habit of saving among the depositors on a regular basis

Lending of funds

Lending of funds constitutes the main business of commercial banks. The major portion of the funds of commercial banks is em ployed by way of advances

Banks lend funds to the public by way of

1 Loans

2 Overdrafts

3 Cash Credits

4 Discounting of Bills

Loans

A loan is a financial arrangement under which an advance is granted by a bank to a borrower on a separate account called the loan account. When a loan is sanctioned to a borrower, the entire amount of loan is debited to the loan account of the borrower, and is paid to the borrower at once in a lump sum either in cash or by transfer to the credit of his current account, if any.

No doubt, some times, deviation from this practice, i.e., paying the entire amount of the loan sanctioned in one lump sum is made in the case of some loans, where the amounts are paid to the borrowers in instalments as and when they need funds. Just as the disbursement of the loan is made in one lump sum, the repayment of the loan also is, generally

Overdrafts

An overdraft is a financial arrangement under which a current account holder is permitted by the bank to overdraw his account, i.e., to draw more than the amount standing to his credit, upto an agreed limit. So, an overdraft implies the existence of a current account. By nature, an overdraft is a temporary financial accommodation to be made use of by the customer occasionally.

An overdraft is granted either against collateral securities or against the personal security of the borrower. In the case of an overdraft interest is charged quarterly or half yearly and is calculated on the daily debit balances

Cash Credits

A cash credit is a financial arrangement under which a borrower is allowed an advance under a separate account called cash credit account upto a specified limit called the cash credit limit. As it is a separate account by itself, it does not require the existence or the opening of a current account.

Purchasing and Discounting of Bills of Exchange

Discounting of a bill is an arrangement under which a bank takes a bill of exchange maturing within a short period of 60 days or 90 days from an approved customer and pays him or credits his current account immediately the present value of the bill

Then, on the due date of the bill, the bank receives the face value of the bill from the acceptor of the bill. In case the bill is dishonoured by the acceptor, the bank re covers the amount from the customer who has discounted the bill. This type of accommodation is, generally, granted upto an agreed limit

INVESTMENT OF FUNDS ON SECURITIES

Investment of surplus funds on securities is one of the important functions of commercial banks.

They invest a considerable amount of their funds in Government and industrial securities.

In India, com mercial banks are required by statute to invest a good portion of their funds in Government and other approved securities

CREATION OF MONEY OR CREATION OF CREDIT

Commercial banks would not have become so prominent, as they are today, if they merely borrow and lend money.

They do some thing more than this. That is, they manufacture or create money.

As they manufacture money, they are called manufac turers of money. So,

"banks are not merely purveyors of money, but also in an important sense, manufacturers of money

SUBSIDIARY SECONDARY FUNCTIONS

SUBSIDIARY SECONDARY Introduction:-

Apart from the main functions of accepting deposits and grant ing advances, a banker also performs a number of other services to customers. Such services are called the subsidiary, secondary. supplementary or ancillary services. By performing the subsidi ary services, a banker will be able to earn the goodwill of his custom ers and attract fresh customers

The subsidiary services of a banker may be classified into two classes,

1 Agency Services

2 Miscellaneous or General Utility Services

Agency services

• The services rendered by a banker as an agent of his customers

• The important agency services rendered by a banker are as follows:-

1. Collection of Money on behalf of Customers:-

A banker undertakes to collect money on behalf of his customers. He collects crossed and uncrossed cheques and bank drafts on be half of the customers and credits the procee to the customers' accounts. He collects bills of exchange and promissory notes on be half of the customers.

He collects postal orders for the customers. He collects for the customers interests and dividends on the coupons and warrants deposited with him for collection and credits the pro ceeds to the customers' accounts.

He collects the salaries of his customers from their employers, when they are away from their places of employment or on leave, and credits the amounts to their accounts.

At times, he collects even the rents due to his customers from their tenants on the rented buildings and credits the amounts to their ac counts. After realizing the cheque, bank draft, bill of exchange, prom issory note, postal order, interest, dividend, salaries, pension or rent and crediting the amounts to the customers' accounts, the banker should intimate the fact to the customers

2. Making of Payments on Behalf of Customers:-

A banker undertakes to make payments on behalf of his customers.

He pays the bills of exchange and promissory notes on behalf of the customers and debits the customers' accounts with the payments. He pays life insurance premium,

subscriptions to clubs, subscriptions to newspapers, rents to landlord, etc., on behalf of customers and debits the customers' accounts with the payments.

A banker performs this service for his customers under their stand ing instructions.

The customers' instructions are noted in the Stand ing Instructions Book and arranged datewise.

The banker makes the payments on the scheduled dates and debits the customers' accounts with the payments. It should be noted that, in performing this service, the banker is required to act without negligence and in accordance with the instructions of the customers.

If he acts without negligence and in accordance with the instructions of the customers, he will not be liable for any losses that may be incurred by the customers

3. Purchase and Sale of Securities on behalf of Customers:-

As a banker has contact with a number of stock brokers, and as the customers are, generally, not conversant with the procedures for buying and selling securities in the stock exchange, the banker un dertakes to buy and sell securities on behalf of the customers.

The banker arranges for the purchases and sales of securities through stock brokers. After the purchases or the sales of securities, he credits the customers' accounts with the sale proceeds of the securities and debits the customers accounts with the purchase price of the securities

4. Advising Customers Regarding Stock Exchange Investments:-

A banker advises his customers regarding investments on stock exchange securities, when his advice is sought by the customers. He collects information on various stock exchange securities and ad vises the customers on the basis of the information collected

5. Arranging for Remittance of funds on behalf of Customers:-

A banker arranges for remittance f funds from one place to an other on behalf of their customers by means of bank drafts, mail transfers and telegraphic transfers. These modes of remittances are relatively cheaper, safer and more convenient

Bank Draft

A banker enables his customers to remit money from one place to another by means of bank drafts. A bank draft is a cheque draw by one branch of a bank upon another branch of the same bank the to pay the money stated therein on demand to the person am named therein or to his order.

The issuing branch of the ban to receives the money the amount to be remitted plus its commi sion) from the customer the remitter, and grants him the ban es draft stating therein the name of the drawee branch

Mail Transfers

A banker helps his customers to remit money from one place to another by means of mail transfers also.

Remittance of money through a mail transfer is, generally, resorted to only when the payee has an account with the drawee branch or the paying branch of a bank Under the mail transfer arrangement

the customerthe remitter of the money, deposits the required money

the amount to be remitted to the payee plus the bank commission, if any into the issu ing branch of the bank. After receiving the money from the remitter the issuing branch sends instructions by mail ( by post)to its drawer branch

the place of the payee to credit the account of the payee named therein with the amount of money spect fied therein. After receiving the instructions from the issuing branch the drawee branch credits the account of the payee with the spect fied amount and informs the payee about the same.

Telegraphic Transfers

A banker helps his customers to remit money from one place to another by means of telegraphic transfers. Remittance of money through a telegraphic transfer also is adopted only when the payee has an account with the drawee branch of a bank.

Under the telegraphic transfer arrangement, the customer, ie, the remitter of money, deposits the required money ( the amount to be remitted to the payee, the bank's commission and the telegraphic charges) into the issuing branch of the bank.

the issuing branch sends instructions by a telegram to its drawee branch in the place of the payee to credit the account of the payee named in the telegram with the amount of money specified in the telegram

Telex Transfers

Telex transfers are also used for transfer of funds.

Under telex transfers, a banker helps his customers to remit money from one place to another by means of telex message. Remittance of money through a telex transfer is adopted only when the payee has an ac count with the drawee branch of a bank. Under the telex transfer